Creeping bond yields unnerve markets

US yields continue to rise

Government bond yields crept higher overnight, notably in the United States where the US 10-year rose above 1.30%, and the 30-year consolidated above 2.0%, rising to 2.08%. With the buy, everything trade spanning equities, currencies and commodities in full swing for most of February, the rise in yields was enough to provoke investors to book profits. That was despite the price action in yields being a repeat of much of last week.

I noted yesterday that another spike in US yields was the only thing that could upset the Biden stimulus/vaccine-led recovery buy everything rally. For once my timing was right, although I can really claim no credit. Financial markets at the moment are schizophrenic, concentrating on a single issue of the day depending on the narrative they want to hear and their positioning while excluding what doesn’t suit. Last night it was bond markets turn to be the dish of the day.

Equity markets retreated slightly, and the US dollar rose, notably against the rate-sensitive Japanese yen. Oil also staged a modest retreat. The price action looks corrective and not a turn in markets’ underlying trends. Yields are almost certain to rise in the United States, especially if the Biden administration gets its USD1.9 trillion packages over the line; definitely, if they look like succeeding with the follow-on multi-trillion green energy/infrastructure new deal.

It will be the pace of the rise in US yields that will dictate whether markets will start weaning themselves of the automatic assumption that equities will always finish the week high, so buy everything. A slow but steady rise will allow other asset classes to adjust. A rapid increase in US yields will likely spark nerves among the buy-everything aficionados. Even bitcoin might fall into such a scenario. But for now, we do not have visibility on which way it will play out. In my opinion, the US 10-year would have to move to 2.0% to threaten the equity rally. Whether the Federal Reserve would allow that to happen is another matter all altogether.

One notable loser apart from the Japanese yen was gold. Having struggled to hold USD1800.00 with a series of dead cat bounces last week, gold sank below that mark by 1.35% to USD1794.00 an ounce overnight. Gold bugs’ nerves will be frazzled, not least because the 50 and 100-day moving averages (DMA’s) both look likely to cross below the 200-DMA in the coming week. Gold’s inflation hedging role has disappeared in a cloud of lead dust in 2021, and it may only find its mojo again after a trip to USD1600.00 an ounce.

In other news, Bitcoin traded at USD50,000 of fiat US dollars, backed by the United States’ tax revenues, yesterday. It continues to flirt with that level this morning. The Tulip mania is given another leg up every time a financial institution mumbles about facilitating client custodial services for cryptos. Failing, in the tulip glare, to distinguish between offering a service to a client, and actually embracing cryptos as an asset class. We are even at the point where a listed US company plans on raising hundreds of millions of debt to buy bitcoin, instead of investing the proceeds in growing their underlying business.

That’s a warning sign if there ever was one that things are getting out of hand in the crypto world. I’m having a 1980’s IPO moment over this, where companies would IPO, raise money, buy a jet, and party like it’s 1999, without doing anything. Anyway, Bitcoin might be USD60,000 tomorrow, or today, I’ll not argue with the speculative momentum. I shall not move, though, until Elon Musk tells me what to do via his Twitter account. That’s how proper financial markets work these days apparently, and I need to be less dinosaur and more digital.

Data from Asia this morning painted an interesting picture. Singapore Non-Oil Exports rose impressively by 7.0% MoM, led by electronics. Japan’s Tankan Survey printed higher with Exports and Machinery Orders well above expectations. Imports though fell by a much worse 9.50% YoY in January. The data suggests that domestic demand remains muted even as the export-facing sectors fire on all cylinders. That is a similar pattern seen across much of Asia, including China and South Korea. There will be limits to US stimulus and Covid-19 vaccines’ economic peace dividend until borders reopen, something unlikely to pick up pace until later in the second half of the year.

United Kingdom inflation data and US PPI data may give us more hints about inflationary pressures accruing in the world economy. US Retail Sales will also be released and are expected to rise by 1.10%. Higher prints across this data set could see US yields move higher again, and with the markets in inflation watching mode today, that could pressure equities, and I frankly fear for gold in such a scenario.

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